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World energy prices are high not because of a physical supply shortage, but because of "anxiety about the reliability of supply," said BP CEO John Browne last Wednesday in announcing the release of BP's Statistical Review of World Energy 2006.

"Supply availability has continued, but at the cost of high prices," said BP chief economist Peter Davies. "Market adjustments are beginning and will continue. There has been a price effect already with coal and [natural] gas prices falling and oil consumption growth slowing sharply and inventories rising."

Browne said despite the conflict in the Middle East and the impact of hurricanes in the Gulf of Mexico, there has been no physical oil shortage. Spare world production capacity, however, is low.

"Prices are high, because spare capacity is low, and because too many of the key suppliers seem at risk," said Browne. "The estimated amount of spare [oil production] capacity in the market is around 1.8 million barrels a day, which is not only lower than normal, but also less than the production from Iran, Iraq, Venezuela, and of course Nigeria which has been the main source of the market uncertainty over the last six months, because violence has reduced supply by some 500,000 barrels a day.

"That is why the world crude price and petrol prices at the pump are so high," he said. "As well as prices, there are longer term concerns about climate change and energy security which are feeding anxiety here in the UK and elsewhere. I don't believe that major companies can stand aside from those issues."

BP's Statistical Review found that world energy consumption growth slowed in 2005 with an increase of 2.7%, down from the 4.4% increase in 2004 which was the largest rise for 20 years.

Total energy consumption in the United States fell by 0.1% last year, the first time since 1985 that the U.S. experienced a combination of higher than normal economic growth and a decline in energy consumption, according to BP. This was largely due to the effect of both high prices and relative energy prices in competitive markets as well as the impact of hurricanes in the Gulf of Mexico -- the decline in U.S. oil consumption was concentrated in the last four months of the year, after the hurricanes, the company said.

Natural gas both in North American and worldwide is in a similar predicament to world oil. World natural gas consumption rose 2.3% last year to 97,060.8 Bcf, while world natural gas production rose 2.5% to 97,533.9 Bcf, according to BP.

BP said North American gas consumption totaled 27,339.8 Bcf (74.9 Bcf/d) a 1.2% decline from levels in 2004. U.S. consumption was 22,362.5 Bcf (61.27 Bcf/d), a 1.5% drop. But U.S. gas production fell 2.3% to 50.84 Bcf/d.

Total North American gas production declined about 1% to 26,496.1 Bcf, mainly because of the damage to Gulf of Mexico infrastructure due to the hurricanes.

BP said worldwide natural gas reserves rose about 0.4% last year to 6,348.1 Tcf In North America, gas reserves were flat at 263.3 Tcf.

Browne said over the next five years BP expects to invest "over US$50 billion worldwide in exploration and production. That investment will bring on stream gas from Alaska, Indonesia, Egypt, the Caspian and, we hope, from East Siberia. It will develop oil from Angola, Russia and the Gulf of Mexico.

"In addition to those international activities, we will also be investing in the North Sea, and the infrastructure necessary to secure supplies for the UK as well. Over the next five years we plan to invest around US$6 billion in developing the remaining resource base in the North Sea to ensure that we recover the maximum amount of both oil and gas. North Sea production has passed its peak, but...there is around 6 billion barrels of oil, and 29 Tcf of natural gas still be to be produced.

"Of course, the growth in demand means that the UK is no longer self-sufficient in natural gas. Imports are now required," Browne said. "But we are a trading nation and companies like BP exist to ensure that the trading system works. And it is working. Despite a cold winter there was no shortage. International supplies are available and the capacity necessary to handle the imports of liquefied natural gas is being put in place with new terminals at both the Isle of Grain and Milford Haven." BP has a 50% stake in the Isle of Grain LNG terminal, which will provide up to 10% of the UK's average daily gas demand and will compete closely with the U.S. for LNG supply in the Atlantic Basin.

"So, as gas demand grows, imports will rise but there is no practical reason why there should be any shortage for UK consumers," Browne said.

He also said that while BP is investing in oil and gas, it is focusing on alternative fuels that can reduce imports and emissions. According to BP, the concentration of carbon dioxide in the world atmosphere currently is around 380 parts per million. "Last year carbon emissions increased by 2.9%, and the level of emissions worldwide is now about 20% higher than it was when the Kyoto protocol was signed in 1997," Browne said.

"Of course, the detailed science of climate change continues to evolve. There are many things we don't yet know. But we in BP don't believe that we can ignore the mounting evidence, the weight of scientific opinion and the risks of a fundamental shift in the earth's climate."

He said while governments must set the rules and framework to curb emissions, companies also have a "crucial role to play. The role of business is not to engage in politics or propaganda. Equally the role is not to deny reality. The role of business is to offer solutions.

"That is what BP is trying to do -- by investing in alternative sources of energy including wind, photovoltaics for solar and the new technology of carbon capture and storage. We will invest at least $8 billion in this new business over the next 10 years." Browne also said BP would invest $500 million to create a new biosciences energy research laboratory attached to a university.

"This will be the first facility of its kind in the world," said Browne. "We have already started discussions with several leading universities here and in the U.S. to identify which could host the BP Energy Biosciences Institute (EBI), with the aim of launching the first research programs by the end of 2007."

"Energy security and climate change are serious issues, but they are not insoluble problems. If you have the will and the means, the issues can be tackled. And that is what we are determined to do."

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